A reduction in an individual's future income will cause:
A)consumption to fall in both time periods because consumption in both years are normal goods.
B)a fall in consumption in the future period but not the current period since the price of future consumption relative to current consumption did not change.
C)consumption to fall in the future period and rise in the current period as the consumer substitutes more current consumption for the future consumption.
D)an increase in current consumption if interest rates are high enough to induce consumption.

Question

Quizplus · Accepted Answer

A reduction in future income affects consumption in both periods because individuals typically smooth their consumption over time, considering their lifetime income. When future income decreases, individuals adjust their consumption downward in both the present and the future to maintain a balanced consumption pattern over their lifetime. This behavior is consistent with the theory of intertemporal choice, which suggests that consumption in both periods are normal goods, and a decrease in income will lead to a decrease in consumption of these goods.

A Reduction in an Individual's Future Income Will Cause